BPCL To Be Bought By Indian Oil
There was news that the Government was planning to sell the Governments entire stake in BPCL to IOC, to strengthen the IOC, a move on the lines of Banking Sector Consolidation. Now there is news that the finance ministry has objected and supported privatisation, by selling the shares to private companies.
The Indian government wants the Indian Oil Corporation (IOC) — the country’s largest oil refining and marketing company, owned by the public sector — to buy the entire central government stake in Bharat Petroleum Corporation (BPCL), in order to meet its highest-ever disinvestment target of Rs 1.05 lakh crore (trillion).
While this amounts to a consolidation of IOC, in keeping with the Modi government’s streamlining of the public sector. ONGC, the country’s largest oil and gas exploration and production company, had earlier bought stake in HPCL. Though many in the private sector eyeing the BPCL share this time, are opposed to IOC it for their own reasons.
The central government owns a 53.29% stake in BPCL, the second largest oil marketing company, valued at around Rs 41,049 crore in the quarter ended June 30.
In fact, the oil marketing companies (OMCs) are currently burdened with the highest debt in five years — the combined debt of IOC, BPCL and HPCL reached Rs 1.62 trillion at the end of March 2019.
Indian Oil alone has a net debt of around Rs 72,227 crore as of the quarter ended June 30. All this due to Congress Governments bad idea of not linking the petrol prices to the international oil market and giving huge subsidies to the public.
On September 2, the Business Standard reported that senior leadership in the Government had given the green light to divestment of the entire stake in BPCL — and that a possible IOC-BPCL merger had been discussed by officials of the Ministry of Petroleum and Natural Gas, Department of Investment and Public Asset Management, Department of Economic Affairs and the Prime Minister’s Office.
While the other option is to sell off BPCL to a private party, the government reportedly seemed more keen on IOC buying BPCL.
However, ever since the news was reported, industry and the business press has been critical of the proposal of Indian Oil buying BPCL. They want the government to straightaway privatise BPCL. This may not be a good idea as we have been seeing how many private companies have been ripping off the country.
While some in the business press have foregrounded how such a deal will severely impact the health of IOC — given IOC’s financials and going by the precedent of the ONGC-HPCL deal — more have objected to the possible merger on the grounds that it would lead to a ‘monopoly’ in oil refining and marketing while discouraging private investment.
“IOCL will have to borrow funds or raise equity from the markets to fund this acquisition as it has planned a capital expenditure of Rs 25,084 crore, has negligible cash balance and has also never generated enough free cash flow in the past to fund such acquisitions,” said BloombergQuint, citing data compiled by it. Though many a times it has been seen that data collected by Bloomberg may be motivated.
On the other hand, “The sale (of BPCL to IOC) will produce an oil-marketing behemoth, controlling fully two-thirds of the petrol pumps in India and over 40% of India’s refining capacity, as well as a majority of the aviation fuel stations,” said another publication.
Waxing on the virtues of privatising BPCL, brokerage firm Prabhudas Lilladher said, “We believe divestment of BPCL to private sector will help maximise revenue for the government (Rs 84,700 crore).”
“Divestment to IOCL will create a behemoth,” it said, “although it is unlikely to alter market dynamics in the near term.”
“While divestment to IOCL is the easy way out, real price discovery of BPCL will happen with stake sale to foreign/private players,” the brokerage added.
Similarly, ICICI Securities said that it would “discourage proposed private investment”.
“Privatisation may improve the broader market sentiment while sale to IOC is likely to hit investor sentiment, especially in PSUs,” it said.
Now, it is reported that the finance ministry, too, has objected to the government’s stake sale to IOC, “as it can create a monopoly in the oil marketing business in India,” reported CNBC-TV18.
“Ministry of Petroleum and Natural Gas is of the view that IOC should acquire 100% of government’s stake in BPCL,” but the finance ministry has objected and is batting for privatisation. Clearly, the finance ministry is giving in to pressure from the market.